A.3 Andrew Thomas, a sandwich vendor at Hard Rock Cafe’s annual Rockfest, create
ID: 442699 • Letter: A
Question
A.3
Andrew Thomas, a sandwich vendor at Hard Rock Cafe’s annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):
STATES OF NATURE (DEMAND)
ALTERNATIVES
BIG
AVERAGE
SMALL
Large stock
$22,000
$12,000
–$2,000
Average stock
$14,000
$10,000
$6,000
Small stock
$ 9,000
$ 8,000
$4,000
The probabilities associated with the states of nature are 0.3 for a big demand, 0.5 for an average demand, and 0.2 for a small demand.
a) Determine the alternative that provides Andrew the greatest expected monetary value (EMV).
b) Compute the expected value of perfect information (EVPI).
STATES OF NATURE (DEMAND)
ALTERNATIVES
BIG
AVERAGE
SMALL
Large stock
$22,000
$12,000
–$2,000
Average stock
$14,000
$10,000
$6,000
Small stock
$ 9,000
$ 8,000
$4,000
Explanation / Answer
a. the incomes with large stock= 22000*0.3+12000*0.5+(-2000*0.2)= 6600+6000-400= $12,200
the incomes with average stock= 14000*0.3+10,000*0.5+6000*0.2= 4200+5000+1200= 10,400
the incomes with small stock= 9000*0.3+8000*0.5+4000*0.2= 2700+4000+800= 7500
b. choosing the large stock will give him the higest returns,i.e. $12,200
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